Making sense of a bootstrap budget

Author

Sir John Bunting Chair of Public Administration , Australian National University

Disclosure statement

John Wanna does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

Each year the budget is like an annual health check on a patient with many complexities. In a black coat, not a white one, the august Treasurer reports the nation’s temperature, provides much-needed tonics and solemnly waves a scalpel over a few unwanted appendices. The budget is effectively a government prescription, curing the perceived ailments presented to date and laying out a prognosis for the years ahead.

So what does the budget really tell us about the state of the economy, Labor’s priorities for reform and its vision for a better country?

The state of the Australian economy

While every budget is a balancing trick, this one is more of a balancing trick than most. It carves out a minuscule projected surplus of $1.5 billion (a wafer thin margin of 0.4% of the budget, and an infinitesimal sum in GDP terms). It brings forward some spending commitments that were meant to be spent in 2012-13 (presumably so that we can borrow to cover this expenditure in this financial year, adding to debt). It delays other spending decisions so as not to impact the next few budgets to enable a semblance of tiny surpluses to be projected. It is also premised on optimistic figures of economic growth, investment, private sector demand and household consumption. It is stimulatory and mildly expansionary, to keep demand up and confidence high, but it does this through a series of cash payments (or bribes) to ease the burden on households.

We have heard much about a “two-speed economy” – implying that different dynamics govern the economy across the continent. Conflicting pressures occur between the dynamics of the highly profitable sectors of the economy such as mining (and the resource-rich states of Queensland and Western Australia) versus the rust-belt sectors in the former manufacturing states of south-east Australia. Global trade has been fortunate to the mining, agricultural and educational sectors, but other sectors have declined massively in their contribution to exports and vulnerability to imports. The two-speed economy has led to a significant increase in the exchange rate for the Australian dollar – unintentionally hurting local producers, tourism operators, some retailers, and many service providers, while encouraging imports, on-line sales, overseas travel by Australians and overseas property buying.

The 2012-13 Budget was framed with these tensions in mind, and so it is premised on redistribution (through direct cash payments and supplementary allowances to welfare beneficiaries) rather than re-investment, with the hope that those with a high propensity to spend will generate more consumer spending.

This intention suits Labor’s political agenda of wooing back disillusioned, working-class voters who have deserted the party in the polls. Those sections of the community that are falling behind are lower paid households and families doing it tough on fixed incomes. Pensioners and benefit recipients of any category are doing it particularly hard because they cannot readily supplement their fixed incomes which have declining spending capacity.

In terms of the economic cycle, we have survived the Global Financial Crisis, but with an inheritance of 4-5 years of large deficits and ballooning debt. With gross debt likely to jump to around 20% of GDP, and net debt 10% or $142 billion, it will still take 10-15 years of future taxpaying efforts to repay this debt. The state of the global economy (and the robustness of our major trading partners) is the major determinant of our growth rates and scope for national income, increased purchasing power and overall wealth. More than ever before, we are dependent now on how everyone else is doing internationally.

In this context the government has decided to compensate the lower echelons of households, families and certain individuals who they have defined as deserving (school kids and students, low-paid families, welfare recipients, the unemployed and disabled). To fund this largesse in a tight budgetary context they have broken other commitments, with business especially (by around $5 billion by not reducing company tax by 1% from 30% to 29%) but also with some other sectors (defence, the states and territories, the public service, limiting foreign aid, intending retirees, PAYE taxpayers with standard deductions, savers with interest income, cuts to pharmaceutical subsidies, and some welfare recipients such as single mothers).

Outside some cash supplementary payments to families for school kids and welfare recipients, much of the budget “spin” is imagery – announcing commitments, and making it appear as if the government is taking positive action, while they are not matching those plans with actual resources. The best example of this is the National Disability Insurance Scheme – which, while announced as part of the budget, commits only $1 billion over four years. This was announced to give the government some good news, although it was not appropriately financed. Much of the debate following the Treasurer’s speech was on how this scheme would be financed in the future and why it was not included in this budget documentation.

Will we see the surplus?

With projections that revenues were down by $12 billion, the government had to make many internal cuts and trimmings to programs and funding measures. Ostensibly, the government made cuts of $32 billion over the forward estimates, and a net cut of $17 billion over four years. This is a big cut made up of many small cuts, spread over four years. The trimming was needed, the Treasurer argued, to balance the budget this year, and without massively deflating economic growth or triggering a recession by the sudden withdrawal of public spending.

Politically, the main question is whether the government can deliver a surplus. A few factors need to be considered before answering this. An election is likely to be held before the financial year is over (or very shortly after, and before the final figures are known in October 2013). Hence we will go to the polls not knowing whether the Gillard government had ever produced a surplus.

If a Coalition government wins (which looks likely), the new government could recalculate and massage the figures for 2012-13 to show a deficit. If in the unlikely scenario that Labor won, then they may be able to arrange their affairs to show a small surplus to underscore some credibility.
However, the election is likely to make many spending commitments and skew the proposed budget yet again – so it will be comparing lemons and oranges. We may never know whether the fifth budget handed down by the Labor government achieved a surplus.

A surplus is theoretically achievable, but rests on very optimistic readings of circumstances over the next 14 months. It assumes that the government holds the line all year, makes no large new spending commitments, can manage to claw back all their proposed “savings”, and that no natural disasters will occur. Most importantly, the budget assumes high commodity prices, good terms of trade, high economic growth, no increase in unemployment, and strong consumer spending. If all this happens, the surplus is achievable. If not, it will disappear - and we could still be reporting deficits for the next few years.

Budget politics and its reception

Labor was understandably crowing about its four projected surpluses but the media were sceptical. Most serious journalists questioned the government’s figures, seeing the budget as a “smoke and mirror” exercise; some doubted the economic growth rates; some accused Treasury of producing politically acceptable figures; some even thought that the cuts were largely cosmetic. Generally, however, the coverage was relatively good and the budget reasonably well-received despite the misgivings.

The Coalition predictably opposed the political drift of the budget. They claimed it was devoid of strategy and vision, was confused, contradictory, and did not include important items such as NBN spending, clean energy projects, or revenues for the disability scheme. Coalition shadow treasurer Joe Hockey focused on the “problem of the debt”, getting excited at the announcement that the government would lift the ‘debt ceiling’ to enable it to borrow funds, perhaps repay any maturing bonds, and anticipate any hold-ups in revenues being available.

Although net debt was hardly changed, this did not prevent the Opposition from accusing the government of recklessness. On the spending side, the Coalition said the government was again bribing families who would be hit by the costs of the carbon tax, and claimed that the government was hypocritical to claim we had to have a flood levy when there was $2 billion in this budget handed back as cash payments. They also claimed that business was hurt, even though the government’s reason for abandoning the cut in company tax was because they would not agree to pass it in the parliament. Despite their bluster, it was not clear that a Coalition government would be able to achieve a budget surplus or where they would make additional cuts or revenue increases.

So what is it all about?

The government had little room to manoeuvre, and chose to give battlers cash in a gesture of goodwill. It was a little disappointing that there was marginal support for increased productivity, investment incentives, measures to stimulate economic growth, carry forward taxation reform or deal with some of the ticking time-bombs of our ageing demographics. The toughness of this budget suggests that the government was not tough enough in the last two budgets and that it should have started its fiscal consolidation (getting a balance) much earlier than it did. The government felt it could not afford to offend its own constituencies, and put their immediate concerns ahead of the nation’s longer-term interests.

I would expect far more “good news” announcements to trickle out as the budget year unfolds and we know better where we are, and as the election date (some 15 months away perhaps) gets ever closer.